A Reformulation of the Portfolio Model of Hedging

A Reformulation of the Portfolio Model of Hedging

The portfolio approach to hedging assumes that the primary motivation for hedging is risk reduction. The paper reexamines the portfolio approach to hedging and respecifies the model in such a way that hedge ratios are estimated using returns rather than price levels. Using the same data set, hedge r...

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Veröffentlicht in:American journal of agricultural economics 1985-08, Vol.67 (3), p.508-512
1. Verfasser: Brown, Stewart L.
Format: Artikel
Sprache:eng
Schlagworte:
Cash
Commodities
Commodity futures
Financial portfolios
Futures markets
Hedging
Investment risk
portfolio model
Price changes
Price levels
risk reduction
Soybeans
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Zusammenfassung:The portfolio approach to hedging assumes that the primary motivation for hedging is risk reduction. The paper reexamines the portfolio approach to hedging and respecifies the model in such a way that hedge ratios are estimated using returns rather than price levels. Using the same data set, hedge ratios estimated using price levels differ from one while hedge ratios using returns are found to be insignificantly different from one. The results do not support the portfolio approach to hedging. Therefore, one must look elsewhere for empirical support for the risk-reduction theory of hedging.
ISSN:0002-9092
1467-8276
DOI:10.2307/1241069